Lender's promise to refrain from asserting his claim and demanding payment until he needs the money arguably
Question:
Lender's promise to refrain from asserting his claim and demanding payment until he "needs the money" arguably is illusory. If so, Guarantor's promise is not supported by consideration and is unenforceable.
An enforceable contract requires consideration in the form of a bargained-for exchange in which a promisor exchanges his own promise for a return promise or performance. Smith v. Newman, 161 Calz. 443, 447, 667 P.2d 81, 85 (1984). The exchange can satisfy the consideration requirement even if one party's promise runs solely to the benefit of a third party rather than to the other party to the contract. Id. The requirement of an exchange, however, is not satisfied if one party gives only an illusory promise, which does not commit the promisor to any future performance. Atco Corp. v. Johnson, 155 Calz. 1211, 627 P.2d 781 (1980).
In Atco Corp., the manager of an automobile repair shop purportedly promised to delay asserting a claim against the owner of an automobile for $900 in repairs. Specifically, he promised to forbear from asserting the claim "until I want the money." In exchange, a friend of the owner promised to act as guarantor of the owner's obligation. Id. at 1212, 627 P.2d at 782. The word "want" stated no legal commitment because it permitted the manager at his own discretion to refuse to perform any forbearance at all. Because the manager incurred no obligation, the guarantor's promise was gratuitous and unenforceable. See id. at 1213-14, 627 P.2d at 783-84.
On the other hand, even if a promise leaves open the possibility that the promisor will escape obligation, the promise is valid if the promisor does not have complete control over the events on which the promisor's obligation is conditioned. Bonnie v. DeLaney, 158 Calz. 212, 645 P.2d 887 (1982). In Bonnie, an agreement for the sale of a house provided that the buyer could cancel the agreement if the buyer "cannot qualify for a 30-year mortgage loan for 90% of the sales price" with any of several banks listed in the agreement. Id. at 213, 645 P.2d at 888. In enforcing the agreement against the seller, the court distinguished Atco Corp.because the word "cannot" referred to the buyer's ability to obtain a loan rather than to his desire. Because his ability p. 158to obtain a loan was partly controlled by events and decisions outside his control, the promises in the sale agreement were nonillusory and binding. Id. at 214-15, 645 P.2d at 889-90.
Despite the superficial similarity of guarantee agreements in both our case and Atco. Corp., our client's case probably is more nearly analogous to Bonnie. Lender's promise to forbear until he "needs" the money appears to condition the length of his forbearance on financial events that are at least partly outside his control: So long as his income and expenses create no need for the money, Lender has a commitment to forbear from demanding payment.
To convince a court to draw an analogy to Atco Corp. rather than to Bonnie, we could argue that the word "need" refers to a subjective perception of deprivation that is inseparable from one's desires. Lender arguably can control his financial needs through his personal spending decisions, subject only to his own discretion.
Unfortunately for Guarantor, the analogy to Bonnie is stronger because financial need is normally viewed as a matter that is controlled at least partly by external factors. Lender's promise probably is not illusory.
What was your impression of the Discussion section? Did the author effectively use IRAC? Do you agree with the author's analysis? Does it adequately explore both sides of the dispute?
Business Law Principles for Today's Commercial Environment
ISBN: 978-1305575158
5th edition
Authors: David P. Twomey, Marianne M. Jennings, Stephanie M Greene